Home

1. Introduction

1.1 Background

The birth of blockchain cryptocurrency came in the form Bitcoin on Jan 3, 2009. The creator, using the pseudonym Satoshi Nakamoto, created the first block, known as the “Genesis Block” that contained a single transaction and generated 50 Bitcoins using a Personal Computer (PC) Central Processing Unit (CPU) [2]. Bitcoin is a peer-to-peer version of electronic cash that removes the need for financial intermediaries such as banks. Transactions are timestamped which form a record that cannot be changed without redoing the hash-based proof-of-work. Since the birth of Bitcoin, the hash calculations have become more complex resulting in the necessity of new hardware that can keep pace with the changing environment.

1.2 Objective

The aim of this work is to study and analyze the mining process and the Bitcoin market. The model described is based on the work of Cocco & Marchesi which had the same objective. “The model simulates the mining process and the Bitcoin transactions, by implementing a mechanism for the formation of the Bitcoin price, and specific behaviors for each typology of trader who mines, buys, or sells Bitcoins[2].” With this model the mining process and the Bitcoin market can be studied to understand how traders behave and how the Bitcoin market performs.

2. Problem Description

Mining Bitcoin is an endeavour which requires an increasing amount of processing power. The hardware utilized to find the so called “proof-of-work”, which validates a set transactions, over time gets more efficient while becoming more expensive. Bitcoins are awarded to those miners that find proof-of-work first. As more users join the network more Bitcoins are generated which calls for more sophisticated means to find proof-of-work. Miners that wish to claim the largest amount of Bitcoins generated must continually upgrade the hardware utilized to validate transactions.

2.1 Mining

Over time, the process of mining Bitcoin gets more complex. As more miners create blocks which generate Bitcoins, and more traders exchange Bitcoins, miners must use more sophisticated processing units to maximize returns. As an additional incentive to upgrade hardware, the number of Bitcoins generated per block created decreases by half each time 210,000 new blocks are created. As a result, processing hardware utilized by miners has evolved.

Mining hardware has made significant developments since the “Genesis Block” was created. It started with the CPU, which in time evolved to the Graphics Processing Unit (GPU), then to the Field Programmable Gate Array (FPGA), and most recently the fully customizable Application-Specific Integrated Circuit (ASIC). With each evolution came an increase in hashrate, a decrease in power consumption per hash, and an increase in cost for the unit.